In Depth

An Oil Boomtown in Iraqi Kurdistan

Erbil, Iraq - Traveling from Baghdad to Erbil, you feel like you're entering a different country, which in a sense you are, since the city is the capital of Iraq's semi-autonomous Kurdish region. New homes stretch out onto the dusty prairie, and the main avenues are dug up as workers lay fiber-optic cables. In the bazaars, horse-drawn carts laden with pomegranate seeds and stewed beetroot jostle with men selling mobile phones from motorbikes. "Every time I go, there are two or three buildings that weren't there before," says Andrew Eberhart, whose Marshall Fund, a U.S. private equity firm, runs a tomato-paste plant near Erbil that he visits several times a year. "There's a lot of energy."

As Baghdad steps up oil production, it might look north to this city for pointers on working with foreign investors. The Kurds have been awarding contracts to overseas companies since 2002, a year before Saddam Hussein's ouster. Today, Canada's Addax Petroleum (acquired by China Petrochemical), Norway's DNO International, and Turkey's Genel Enerji International have contracts for the Taq Taq and Tawke fields in Kurdistan. The Kurds say they could produce 200,000 barrels a day by the end of 2010—about 10% of Iraq's current output—up from a maximum of 100,000 barrels daily last year.

The north's stability is strengthening the hand of Kurdish President Massoud Barzani as he bargains with Baghdad over oil resources. In the run-up to national elections in March, the Kurdish region—where nearly 20% of Iraq's 29 million citizens live—isn't shy about parading its autonomy: Police wear Kurdish uniforms. The region's red, white, and green flag is ubiquitous while Iraq's is nowhere to be seen. Kurdish parties will participate in the election, but Barzani isn't a candidate.

EXPORTS ON HOLD

The catch is, the Kurds can't sell their oil abroad without help from the government of Prime Minister Nuri al-Maliki, which controls export pipelines. Since the Kurds started oil exports in June, Baghdad has refused to pay the international companies for their share of the export revenue, saying Barzani's government had no right to sign its own contracts. That's "unfair and unreasonable and illogical," says Falah Mustafa Bakir, the region's de facto foreign minister. In October the Kurds suspended exports, and the region's output has slumped to 20,000 barrels a day.

While locals and foreigners alike praise Kurdistan for building up its infrastructure and welcoming investment, tension between the Kurds and Arab Iraqis remains a concern. Barzani says Kirkuk, the province southeast of Erbil that produces a quarter of Iraq's oil, should be part of Kurdistan. A local referendum on that question has been delayed for two years, and both Barzani and Maliki have built up military forces in the province. "If you clash with your neighbors, it's difficult for investors to believe in the area," says Baz Karim, chief executive of Kar Group, an Erbil company with $1 billion in energy and building contracts.

Nonetheless, there's a mood of optimism in Erbil. Karim is building a 13-story tower in the city as Kar Group's headquarters and is expanding Kar's oil refinery. The boom marks a dramatic shift from the 1980s, when Hussein's troops killed thousands of Kurds, and the impoverished 1990s when the region was cut off from the rest of the world. "A few years ago there was no money, no electricity, no banks," says Dara Jalil Khayat, head of the Erbil Chamber of Commerce, whose glass-fronted offices stand out against the 6,000-year-old mud-brick Citadel that looms over Erbil's center. "Now we have lots of industry."